Retail Losses Figure in Unemployment Numbers

MBA (7/7/2008 ) Murray, Michael
Retail property remains a concern for industry analysts, particularly following recent unemployment figures and store closings.
For example, Property and Portfolio Research, Boston, reported that Phoenix—a bellwether city for commercial/multifamily real estate—has experienced a 28 percent drop in retail construction growth since its peak in 2005, when its growth rate was 15 percent. So far this year, the Phoenix retail construction market has contracted to minus-13 percent.

Mark Hickey, real estate economist at PPR, said construction accounts for twice as many jobs in the South and Southwest than they do in the Northeast, in places such as Boston and New York City. PPR estimated that although Boston could lose 1 percent of its construction jobs, it can also weather the bad stretch better than cities in the South and Southwest.

"The construction sector for many of these metros in south and central Florida and in the Southwest is much higher than it is in the Northeast," Hickey said. "There are not nearly as many losses in Boston as there would be in Phoenix."

The results suggest that areas of Florida and Southwestern cities, such as Phoenix, Las Vegas and Los Angeles, which experienced population growth during the housing boom, could see fewer jobs, reduced population and more shuttered retail properties.

"As the population base expands, you need firemen, teachers—professions to service a larger population base," Hickey said. "Now, population growth in 2008 in Phoenix is only going to be about 16,000. Not only do you lose jobs in construction, mortgage lending, real estate brokers—but you ignore the growth in teachers, firemen and other service professions.”

The Bureau of Labor Statistics on Thursday reported 33,000 jobs lost in the manufacturing sector and 43,000 jobs lost in the construction industry—half of those in housing construction. Since its peak in September 2006, construction employment has dropped by 528,000. Business and professional services cut 59,000 jobs last month with 30,000 dropped in temporary help services, BLS said.

Hickey said job losses in Las Vegas or Phoenix—lower-paying jobs in retail and warehouse sectors compared to Northeast areas—could hinder retail. He noted that professionals in New York and Connecticut, with a high per capita of income could find insulation from a weak financial sector, while others hit by layoffs could receive lengthy severance packages that would stave off a retail fallout in the region. However, if a shaky capital markets sector continues in New York City, retail properties and financing for retail properties could take a hit.

"From talking to some people who still work in the commercial lending environment—and seeing their business dry up—there are a lot of people looking for jobs," Hickey said. "It's a hard industry to find work in now."

Furniture stores have already been hit hard by the housing crisis; the service industry is also feeling the pinch, with Seattle-based Starbucks announcing last week that it would close 600 stores throughout the United States—70 percent of which had opened since 2006.

The impact of Starbucks on commercial mortgage-backed securities (CMBS) should remain minimal, based on a report from Realpoint LLC, Horsham, Pa. Realpoint's said it would monitor all 320 secured loans in Starbucks locations with a $1.2 billion combined principal balance in 316 CMBS transactions—all current—but the firm said Starbucks closings would leave a small impact because the stores occupy a small gross leaseable area(GLA).

"Indeed, Starbucks occupies greater than 20 percent of the collateral space in only about 17 percent of the loans by balance [107 loans]," the report said. "What's more, the larger the loan balance, the smaller the size of the Starbucks space as a percent of GLA, and thus the smaller the overall effect. Of loans greater than $3.5 million, Starbucks occupies more than 20 percent of GLA in only two loans."

Abigail Marks, economist at CBRE/Torto Wheaton Research, Boston, said the impact of the housing crisis on the housing-related sector retail sales has been diminishing.

“We are also seeing the magnitude of the deceleration in housing starts slow, which means that the drag on retail sales in the housing-related sectors should be slowing as well,” Marks said. “As several major housing-related retailers have cut back on their construction pipeline, we feel that this sector is poised to not have any further closing announcements."

Marks added that forecasting brand closings using completed projects in the pipeline appear to work only for the housing-related brands.

“Ethan Allen, Home Depot and Lowe's all have fewer projects finishing in 2007-2008 than in 2005-2006—a notable change in the number of projects is a good indicator of trouble ahead for these retailers," she said.